塞納 (CERN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cerner Corporation's first quarter 2008 conference call. Today's date is April 22, 2008, and this conference is being recorded. The Company has asked me to remind you that various remarks made here today by Cerner's management about future expectations, plans, perspectives and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions of the Security and Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements may be found under the heading "Risk Factors" under item 1a in Cerner's Form 10-K, together with other reports that are on file with the SEC.

At this time I'd like to turn the call over to Marc Naughton, Chief Financial Officer of Cerner Corporation. Please proceed.

Thank you, Michelle. Good afternoon, everyone, and welcome to the call. I'll lead off today with a review of the numbers followed by sales and operational highlights from Mike Valentine, Executive Vice President and general manager of the U.S. Trace Devanny, our President, will discuss our global efforts and our physician practice business. Trace will be followed by Jeff Townsend, Executive Vice President and Chief of Staff, who will discuss innovation. Neal Patterson, our Chairman and CEO, will be available for Q&A with us today.

Now I'll turn to our results. Bookings, operating margins, earnings and cash flow performance were all at or above expected levels and our outlook for 2008 remains strong. Like last quarter, we delivered expected levels of gross margin, but our revenue was less than expected. An important difference this quarter is we did have good growth in software, but this good growth in software was offset by a year-over-year decline in technology resale. I'll discuss this more in a moment. Moving to bookings, our total bookings revenue was $347 million, which is the high end of our guidance range. Bookings are basically flat compared to Q1 '07, which included $50 million of retainment related to our hosting business. Adjusting for this, bookings are up 14% year over year. Moving to backlog, our total backlog increased 21% year over year and ended the quarter at $3.35 billion. Contract revenue backlog ended the quarter at $2.79 billion, which is 22% higher than a year ago. Support revenue backlog was $555.7 million.

Our revenue in the quarter increased 5% over Q1 '07 to $384.8 million, which is about $5 million below the low end of our guidance, driven by a year-over-year decline in system sales, which was again driven by lower hardware sales that offset growth in software. The revenue composition for Q1 was $116.2 million in system sales, $107.9 million in support and maintenance, $151.9 million in services, and $8.7 million in reimbursed travel. System sales revenue was down 5% compared to Q1 '07. As mentioned, this decline was driven by lower hardware sales, but it's important to note that we did have good growth in software,- which is very positive after the decline last quarter and last year. However, the growth in software was more than offset by the decline in hardware. Given lower hardware sales the past two quarters, we took a conservative approach to hardware revenue in arriving at our guidance going into Q1, but still ended up below expectations. Similar to past quarters the lower hardware had little impact on our gross margin dollars.

Services revenue, which includes managed services and professional services, grew 9% compared to the year-ago quarter, driven primarily by strong managed services growth. Our professional services revenue was only up 1% year over year, due to slightly lower billable headcount in the the U.S. and less services revenue in the southern region of England related to the contract reset, which has slowed the pace of new implementation work. We have hiring plans that should drive growth in U.S. services revenue as we move through the year, and we expect work to ramp up in the southern region later this year. Note that we have continued to staff to demand in the UK, so the lower services revenue does not materially impact the overall profitability of the southern region, and we still expect to be recognizing margin on both regions by the end of the year. Support and maintenance revenue grew a strong 15%, reflecting our delivery on system implementations.

Looking at a geographic view of revenue our domestic revenue grew 7% year over year and our global revenue declined 1.6%. As I have mentioned, the strength of hardware sales during the first half of 2007 was driven by global hardware sales, which were down about $6 million year over year in Q 1. This coupled with lower services revenue in the southern region of England led to the lower year-over-year global revenue, despite strong growth in most of our other global business models and regions. The comparable for global revenue will be very tough in Q2 as well, because the record hardware sales in Q2 '07 were concentrated outside of the U.S.

Moving to gross margin, our gross margin for Q1 was 83.3%, which is up 310 basis points from a year ago and up 80 basis points from Q4. The higher gross margin percent reflects the lower hardware sales and growth in software. This is also reflected in the system sales margin percent, which increased from 61.7% in Q1 '07 to 65.4% this quarter. We also had improvements in our support, maintenance, and services gross margins, which increased from 93.0% to 94.1% year over year, driven by lower third-party costs. These stronger gross margin percents again led to margin dollars growing faster than revenue, with margin increasing 9%, well above the 5% growth in revenue. As we've indicated, we view the 9% growth rate in gross margin as more reflective of our performance than the 5% growth in revenue, since our gross margin is very similar to net revenue, which neutralizes the impact of fluctuating levels of third-party sales.

Last quarter I discussed in some detail items impacting our system sales, with the primary item being a continued slowdown in the resale of hardware. This slowdown is being driven by a fundamental shift in our business, where clients are adopting our server-hosted model instead of buying hardware up front from us. As we have said, the financial impact of this trend is very positive in the long run because a low-margin, up-front hardware sale is being replaced by higher,margin, recurring managed-services revenue stream, but the decline in hardware is impacting our system sales in the near term.

We are continuing to look for opportunities to grow our technology resales business, including potentially reselling devices as part of our CareAware strategy and expanding global channels. However, we think it is prudent to assume that the lower level of hardware will continue for the foreseeable future. The impact that declining hardware will have on our growth rate should peak in Q2 of this year, because Q2 '07 revenue included an all-time high level of hardware due to few large global hardware sales. Beginning in Q3 of this year the hardware component of system sales will have normalized and we expect to be able to show growth in system sales in the second half of the year.

Shifting to software, I should note that we showed good progress at reversing a slowdown in software sales that occurred in 2007 with good growth in software in Q1. Recall that much of our client base was focused on adopting our latest version of Millennium last year, and since the perpetual license to Millennium means upgrades are free of any additional license fees, the activity did not add to license revenues. The focus on doing the upgrade also impacted our ability to sell what we call white space Millennium applications back into our base in 2007. While we still have clients doing upgrades we believe we are through most of this impact, as current upgrades can be done faster with less disruption. Also, since the next several releases will be based on the Millennium 2007 code set, we don't expect an impact on white space activities when we roll them out.

Moving to operating expenses and earnings, our operating expenses, before option expense, in Q1 were $260.4 million, which is up 60% over a year ago. Sales and client service expenses were up 9%, with managed services growth being primary driver. Software development was up 5%, which is in line with expected levels. G&A expense was down $3 million, or 12% year over year. The decline in G&A was driven by a higher-than-expected benefit from foreign currency exchange. These FX gains and losses have always run through our G&A as an increase or decrease to the expense, but has usually not been significant one way or another. This quarter we had expected about $2 million to $3 million gain when we provided guidance on January 31st, which would have led to flat year-over-year G&A expense. We ended up with a $5.6 million gain, which drove the decline in G&A. The $2.6 to $3.6million difference between our planned levels and the actual gain benefited EPS by $0.02 to $0.03 in the quarter. The higher amount of FX gains were primarily driven by the weaker dollar, and we don't expect large gains or losses in the future unless the dollar sees sizable movements in exchange rates.

Our GAAP net earnings in Q1 were $36.8 million, or $0.44 per diluted share. GAAP net earnings, including stock options expense, which had a net impact on earnings of $2.2 million, or $0.03 per share. Excluding options expense, adjusted net earnings were $39.1 million, which is 30% higher than Q1 of last year. Our adjusted EPS was $0.47, which is $0.03 higher than the consensus estimate and our guidance range. But as I mentioned, the higher FX range contributed $0.02 to $0.03, so we review our performance as in line to slightly better than our expectations.

Moving to operating margins, our operating margin, before options expense, in Q1 was 15.6%, up 250 basis points over the prior year. This quarter our operating margin was impacted by about 80 basis points due to approximately $20 million of zero margin revenue from our projects in southern England and London with Fujitsu and BT. The initial FX gain also benefited our operating margins by 50 to 80 basis points. Overall we remain on track for our goal of achieving 20% operating margins in 2009. Note that our path to 20% continues to include the assumption that we will be able to recognize margin on our UK contracts by the end of 2008, which remains our current expectation.

Now I will move to our balance sheet. We ended Q1 with $251 million of cash and $101 million of long-term investments or auction-rate securities. Total debt was $192 million. As you note on our balance sheet, we've moved our investment in auction-rate securities from short-term investments to long term to reflect the current lack of liquidity in that market. The $101 million on the balance sheet reflects approximately a $5 million reduction from par value. We review this impairment as temporary, due to the underlying credit ratings of the securities and intent and ability of the Company to hold the securities until the market recovers. I would stress that the vast majority of our auction-rate securities are AAA rated and backed by the U.S. government or state governments, unlike many of the ARS that represent collateral mortgages or corporate debt. I would also note that $5 million temporary impairment does not impact the income statement but is reflected in comprehensive income on the balance sheet. We believe our $251 million of cash, available $90 million line of credit and expected free cash flow for the year should more than meet the Company's cash needs. As an aside it's worth noting that our ARS are currently yielding an average tax-free return of over 5%.

Total accounts receivable ended Q1 at $388 million. Contracts receivable, or the unbilled portions of receivables, were $138 million, or 36% of total receivables, which is down from 39% in the first quarter of last year. Our DSO was 92 days in Q1, which is up two days compared to the last quarter and three days from a year ago. The year-over-year increase is driven by an increase in billed receivables as opposed to unbilled items, which are flat year over year. Third-party financings were $20 million, or 5% of the $427 million of total cash collections. Operating cash flow for the quarter was $51 million, which is up $42 million -- from $42 million a year ago. Q1 capital expenses were $31 million, including $5 million of property expenditures. Capitalized software in Q1 was $17 million. Free cash flow defined as operating cash flow less capital expenditures and capitalized software was $3 million. This compares favorably to the negative $23 million of free cash flow in Q1 of last year and we maintain our target of $80 to $100 million of free cash flow for 2008.

Moving to capitalized software, the $17 million of capitalized software in Q1 represents 23% of the $75.2 million of total spending on development activities. Software amortization for the quarter was $11.0 million, resulting in net capitalization of $6 million, or 8% of the total. On software amortization, as we communicated last quarter the $2.4 million decline compared to Q4 '07 reflects the completion of the amortization of amounts capitalized in 2002. We expect amortization to increase on the second half of the year when we roll out our next release of Millennium 2007. The rollout of this next release will trigger an increase of approximately $4 million per quarter. We expect part of this increase to occur in Q3, with exact -- the exact amount depending on when the release occurs.

Now I'll go through the guidance. Looking at Q2 revenue we expect in the $390 million to $405 million range. This guidance reflects growth similar to the 5% level in Q1 and assumes a more conservative stance on hardware. Note that Q2 is by far our toughest comparable for the full year, as revenue grew 17% in Q2 '07, driven primarily by the unusually large hardware sales. We expect our revenue growth to continue to strengthen in the second half of the year, but we will likely be on the low end of our 10% to 12% revenue growth goal for 2008 due to the lower hardware and lower professional services in the first half of the year. We expect Q2 EPS, before options expense, to be $0.50 to $0.51 per share. This guidance is $0.01 less than consensus which is artificially high due to two outlier estimates for Q2 '08 that had assumed 34% and 37% EPS growth for Q2 and caused consensus to go up from $0.51 to $0.52. The Q2 guidance is based on total spending, before options expense, of around $265 million.

For the year we continue to expect EPS, before options expense, to grow more than 20%. n our last call we indicated comfort with consensus of $2.14 per share. With the $0.03 over attainment in Q1 we are now comfortable with $2.17 for the year. Note that this guidance assumes we have no materially negative impact from foreign currency exchange for if remainder of the year. Our estimate for options expense for Q2 '08 and 2008 is approximately $0.03 and $0.12 to $0.13 per share respectively. For bookings, we expect bookings revenue in Q2 of $370 million to $400 million. This guidance assumes about $20 million less hardware bookings than Q2 '07, which was an all-time high. Similar to our revenue guidance, our bookings face a tough comparable, with bookings growing 25% in Q2 '07, even after adjusting out a $98 million UK book.

Before turning the call over to Mike I wanted to highlight the stock buyback we announced today. Our board approved a stock repurchase program, authorizing the repurchase of up to $45 million of common stock. We believe that some of the shifts we have discussed that are occurring in our business and impacting our top line in the near term appear to be contributing to a market value that doesn't reflect the significant opportunities we have in the long term. Therefore, we believe the repurchase of our stock is a good use of funds. We plan to execute this program by repurchasing shares from time to time in the open market, by block purchase, or possibly through other transactions managed by broker/dealers. Based on today's closing price, approximately 1.1 million shares could be repurchased if we fully exercise the program.

With that I'll turn the call over to Mike.

Thanks, Marc, and good afternoon, all. Today I'm going to cover sales, operational highlights, and marketplace trends. From a sales perspective, we had a good quarter, with a return to good software sales. While the top-line benefit of improved software was offset by continued lower levels of hardware sales we obviously feel better about the mix of our revenue, including stronger software. In Q1 we did $346.6 million of bookings, which is our second highest level of bookings for our first quarter, with the highest being Q1 of last year. As Marc mentioned earlier, results last year included $50 million of hosting over attainment. Our growth against Q1 of last year adjusted for this was 14%. We had a good mix, with 11 contracts over $5 million, seven of which were over $10 million. 25% of our contract bookings were for new Millennium footprints, which is higher than all but one quarter in 2007 and consistent with what we have been communicating about an increase in opportunities outside of our installed base.

From a leading indicator perspective, we continue to see strong levels of vision center visits, RFP activity and our pipeline that grown consistently, with a continued strong level of new footprint opportunities over the next several quarters. Specifically worth highlighting is that our vision center activity was at an all-time high in Q1, with significant increases year over year and sequentially. Historically, the level of vision center visits has proven to be a good leading indicator of sales activity in coming quarters, so we are encouraged to see this activity level to start the year. Operationally we had another solid quarter of execution, with strong levels of conversions across a wide range of venues around the world. During the quarter we did 394 conversions of Cerner Millennium Solutions and now have done nearly 8,000 cumulative conversions at nearly 1,300 facilities.

I'd like to note a change in how we talk about operations going forward. While conversions were a useful measurement back in 1997 and several years after that, as we were trying to show progress at rolling out the then new Millennium Solutions, they are less relevant as a metric today, given that we have clearly established the scale and industrial strength of Millennium. Additionally, changes in the packaging of our Solutions have made counts less comparable to prior periods. Therefore, we don't plan on reporting these conversions going forward. but we will continue to provide color on our operational performance that is more relevant to how we are running the business day to day.

On the competitive front we had a good quarter in Q1, as reflected by us getting 25% of our bookings from new business development. In general it remains very competitive, but no more competitive than in the past. We continue to like our position as the provider with the most depth and breadth of solutions, industrial strength architecture and established Cerner brand. And this competitive differentiation is augmented by our proven ability to deliver with implementation tools and methodologies that help our clients drive quality and predictability up, while at the same time driving cost of -- total cost of ownership down.

Looking it at the overall marketplace we believe the market remains solid. As I mentioned, our leading indicators are very strong and reflect a good mix of opportunities across most segments and both inside and outside of our installed base. Demand continues to be driven by CPOE, with increased focus going beyond just basic CPOE to include more robust clinical documentation, decision support and closed-loop medication administration. We are uniquely positioned to offer true closed-loop medication administration with all of our Solutions on a common platform, including our R X station medication dispensing units, which add an important additional level of safety and improve workflow. Other areas of emerging opportunity that represent what we call "white space" include revenue cycle, risk packs and device connectivity.

On the revenue cycle front we have made good progress with our ProFit solution, which is a clinically-driven approach to revenue cycle, and we are well positioned to participate in what we believe will be a replacement cycle over the next several years. We've also improved our position in the risk PACS market with our new ProVision PACS workstation, which is a very attractive offering for our clients who are looking to move their PACS system to a common platform and is also competitive outside our installed base. And on the device connectivity front there's a substantial amount of opportunity, both inside and outside of our installed base, as we are still in the very early stages of adoption for solutions that connect medical devices to the EMR. And our early success in this space leads me to believe that we will benefit significantly as we move more -- as more hospitals look to improve safety of workflow by integrating the information from their medical devices with their clinical systems.

In addition to the white space solution opportunities we are also seeing opportunities to grow our services business. One example of this is the Application Management Services, or AMS, which goes beyond what we do with our traditional managed services, as we are helping clients manage not only their technology but also their applications. Another example of services opportunity is transformation services, where we are helping our clients leverage both -- leverage their digital Millennium platforms to optimize their performance. Both AMS and transformational services provided strong contributions to bookings in Q1 and the revenue impact ramps up as we move through the year.

I'd like to make one other comment on the broader market. Many of you have asked if the issues in the credit markets, specifically auction-rate securities, are having an impact on our clients' ability to purchase IT. Many of our clients are dealing with auction-rate securities issues, but we have not seen it have a significant impact on their purchases of clinical systems. While some of the surveys done by the sales side reflect mixed results, the two consistent take aways from the surveys are, first, healthcare IT spending is still expected to grow, and second, HIT spending remains a top priority for most hospitals and other items would likely be cut before HIT if hospitals did have to cut budgets. We believe this is especially true for solutions like Cerner's that directly support pay-for-performance initiatives. I don't want to leave the impression that we are dismissing the chance that the credit markets could impact our clients' IT purchasing, but we are not seeing it having significant impact at this time.

With that I'll turn the call over to Trace.

Thanks, Mike. Good afternoon. Today I would like to discuss some good progress in our international business and physician practice Solutions. On the global front we had a solid Q1. As Marc mentioned, our global revenue declined slightly year over year, primarily due to declining hardware sales, but that is not reflective of the continuing progress we have made or of our strong international position going forward. Specifically, we had a strong bookings contribution from global, including contracts from another large academic medical center in France, as well as our first client in South America. We expect additional business to come from both France and Latin America in 2008. We also had a strong year-over-year increase in profitability despite the lower revenue, which is consistent with the revenue decline being driven by hardware. We also made good operational progress.

In England, despite a slow down during the contract reset in the southern region we continued to successfully bring Solutions live in both that region and in London. Since last quarter we have launched many more Solutions in numerous acute care facilities. We now a total of 61 sites and 313 Solutions live, which is up from 55 sites and 255 Solutions last quarter. In addition, use of our Choose and Book national scheduling and referral system has been steadily increasing and is now being used for about 50% of referrals according to Connecting for Health. This marks a significant milestone in the Choose and Book -- in the use of Choose and Book, which has now been used for more than six million referrals, considerably up from about one million a year ago, illustrating that this solution is becoming very mainstream to the National Health Service.

Moving to our PowerWorks physician practice business we had a good start to the year with solid bookings growth, particularly bookings to new providers. We are also making progress on several of our pilots with large acute care clients who are promoting PowerWorks as a preferred EMR in their physician-provider communities. As I have mentioned on previous calls, our clients' believe that Cerner's unified architecture, supporting both the inpatient and outpatient environment, is an important competitive advantage. This opportunity to leverage our large installed base is substantial, with the potential to more than double the number of providers using PowerWorks over the next five years.

Last quarter I mentioned that we had expanded our PowerWorks market by signing our first outpatient surgical center. I am pleased to report that we have already successfully brought our PowerWorks solution live at this site, which specializes in spinal surgeries. This represents a great start for Cerner's ASP model and package of solutions geared specifically for ambulatory surgery centers. A broad range of solutions were implemented including, PowerWorks surgery center EMR suite, surgery, scheduling, registration, clinical supply chain, practice management and anesthesia. In addition, we implemented CareAware medical device bus, which is connecting 15 patient monitoring devices to the electronic medical record. At Cerner we continue to drive innovation into new markets by leveraging our broad range of solutions and our proven delivery and hosting capabilities. We expect to build on this success and we have a strong pipeline of similar opportunities that will continue to fuel future growth in this critical physician marketplace.

With that I'll turn the call over to Jeff.

Thanks, Trace. Today I'm going to provide a couple of quick updates on our CareAware platform and make some broad comments on Cerner's long-term opportunities. Our CareAware platform is a new architecture that was started in 2005. The core principle around its development was the premise that electronic medical records created a new digital medium for care delivery. From there the entire care delivery experience could be redesigned to include a contextual awareness of the entire experience, well beyond the workflow represented on the screen. Our CareAware MDBus device connectivity solution allows medical devices to be connected to the EMR through a USB-like plug-and-play connection. It is more than just connectivity, as today these devices require human interaction to adjust to the changing treatment or context of patient care. Making the devices and the EMR aware of each other introduces a new paradigm in what's possible.

In Q1 we signed several more clients and completed 51 new drivers, which increased our library of device drivers by over 50%. We also made good progress with rxStation, our medication dispensing units. We shipped our first production units of rxStation in the fourth quarter of last year and we are in the final stages of completing the implementation at our first site. Early feedback has been positive and we have a strong pipeline going forward. Again, what was once an island of information in an isolated experience is now a comprehensive workflow with a single source of truth.

Our marketing approach to the CareAware suite of solutions is experience oriented. You have to see it in context to understand it. Beginning in May, through a collaborative effort between Cerner and Steelcase Incorporated, we are taking the Smart Room, MDBus and rxStation on a mobile tour. Between May and December the Cerner Smart Semi will visit over 40 major cities, showcasing our innovative technology and workflow solutions in three venues; the medical surgical Smart Room, a caregiver area featuring the rxStation, and a waiting room. Inside the semi we will be demonstrate the complete redesign of the Care experience, with Cerner CareAware MDBus providing connectivity to numerous devices, including a Hill-Rom bed, CareAware my station providing ridge content for patients and families, and rxStation tower showcasing nursing workflow through both the touch screen Solution and CareMobile handheld devices.

Now I'd like to make a few comments about our long-term growth opportunities. During this period when some shifts in our business have led to top-line growth that is not reflective of our fundamental strength, we believe it is easy for some to lose sight of the significant potential for Cerner. We believe we offer a significant value proposition to the largest segment of our economy. As most of you know, the healthcare spend in the United States is expected to nearly double over the next ten years moving from just over $2 trillion to more than $4 trillion. Similar trends exist in almost all other major developed countries. This is an unsustainable rate of increase that must be addressed. We will not solve it alone, but our mission to eliminate all inappropriate variance, avoidable medical error, unnecessary waste, needless delay and costly friction will make a significant contribution to addressing healthcare spending issues, and the growth opportunities involved in achieving our mission are substantial.

There's an amazing amount of complexity in healthcare, which is why there's no simple solution or quick fix to issues that are causing spending to increase. Certain has a long history of working through complexity to address the future needs of the healthcare industry. To date the most consistent trend worldwide is to increase the measurement of quality, then linking those to pay-for-performance initiatives. This plays to our clinical strengths. In addition, we see this trend (inaudible) in a wave of requirements well beyond workflow, which requires innovation at the point of decision, in context, which will drive an expanse of our Solution portfolios, not just in software and content but also in services, the substantial value of the large and strategic client base we've built over the past 29 years, coupled with our strategic initiatives that are expanding boundaries to address a much bigger portion of healthcare spend, positioning us for another wave of very strong growth.

As Marc mentioned, our clients are getting value from the 2007 Millennium release, and we are positioned with the next set of Solutions that lay on top of that release. The next layering of complexity is applying the context of condition to the traditional role venue. For example, it is no longer just emergency medicine, but the added context of the patient's condition, the continuum of care prior to the ED visit, and the continued coordination of care beyond the visit. Adding women's health and condition-specific offerings such as oncology and cardiology will create new opportunity on top of our existing network. Many companies, large and small, sense the business opportunities inside healthcare but few, if any, have the scale, the experience, the team, the technology and the vision to make a big difference. That is why for the past three decades the names of our competitors change routinely while Cerner's consistently innovated to create strong organic growth, and we believe what we have accomplished so far is only the beginning.

We understand the importance of focusing on short-term results. We have a great track record of doing that over time and we believe we are close to working through the shifts in our business that have impacted our top line past few quarters, but when we step back and look at our business we also think it is important to see where the next billion dollars of revenue is coming from.

With that I'll turn it over to the operator to take questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Charles Rhyee of Oppenheimer. Please proceed.

Hi, just a quick question. You talk about -- we've now had a couple participants in the market refer to particularly the month of March as saying that it was difficult where they'ver seen the pull-back in spending and the comments that I'm hearing from you guys is that you're not seeing this. Can you give us a description of maybe where your customer base might differ from some of these other competitors that we've heard negative comments out of?

Yes, this is Mike. I'll take the first shot at that. We mentioned before the auction-rate securities of being on the radar of our clients and specifically most of our larger clients, but what we saw happen in the quarter is this is just something they had to deal with. It was literally in their windshield. Most of them took action in Q1, if not, took action clearly early in Q2, but we didn't see it change the direction they were headed as an organization. So their decisions around utilizing Cerner and their active Cerner initiatives weren't impacted -- the financing wasn't impacted as we move forward. So we saw it out there. It was definitely something that was in the windshields of our clients, but the kinds of initiatives that they funded with Cerner are long-term initiatives that actually help better position them on their revenue-generation side of the house, so they're staying the course relative to their investments in our types of solutions.

Okay. If I can quickly follow up, apart from the auction-rate securities issue, if you think more broadly to the macro environment and the direction of perhaps the economy, can you give us a sense of your conversations with your clients in regards to how they're trying to position themselves in light of potentially a weakening economy and how that might affect their business?

What we see them -- what we see them very focused on is positioning themselves for the pay-for-performance initiatives and continuing their journeys around efficiencies leveraging our technologies. So we -- I think the general point that I would make is that they view us as a longer-term solution for addressing their operational efficiencies and just very specifically, how they get paid, so they're viewing us as fundament to whatever the economy looks like going forward.

And Charles, this is Neal. I'd just also -- I think there's a -- the place where I think our clients get hit with a downturn is primarily in bad debt, and just my anecdotal sampling is even though they're seeing a little bit of that it is really not impacting the financial health of the people we work with. So we're just not seeing it quite the way I think other people described it, so I don't know what that says, but we can't speak for what they're seeing. We can speak to what we're doing.

Great, thanks for the comments.

Your next question comes from the line of Bret Jones with Leerink Swann. Please proceed.

Good afternoon, thanks for taking my call. I have just a couple quick questions. I was wondering if the new initiatives in aggregate, when we think of CareAware, rxStation, the Application Managed Services, the transformation services that you spoke about earlier, if they're becoming a meaningful percentage of bookings in aggregate?

I would say they are. Each of them has a maturity cycle of their own, but I think the traction that we've seen -- I'll speak to AMs, the Application Management Services, our clients have become very comfortable -- our client base the population of prospects that we talk are very comfortable with the managed services model. And historically for Cerner, managed services has meant the management of the technology and hosting of the technical side of the equation, and what we're doing with the Application Management Services is essential just broadening out that curtain of management to include more of the application, and we think the growth opportunity there is not only in our base of our managed service clients but also a whole new wave of growth, as well. So it was meaningful to us in Q1.

Of the ones that you spoke of, I think they have the best near-term meaningful impact to our -- both our top line and bottom line. The CareAware, specifically the MDBus components, hold good potential and I would describe our launch over the last quarters as being -- we're very optimistic about what we're seeing. Even though the vast majority of clients that are making the decision towards the MDBus component of CareAware are doing it in a pilot--like phase there's good upside once we get out of pilot phase and go across the enterprise ao -- and we just tipped the -- the tip of the iceberg in terms of the coverage that we have of the MDBus in terms of number of devices that connect in. So we're very encouraged in that space, as well.

Okay, I was just trying to get to -- I guess my concern is the health of the core clinical market and where we are essentially from a saturation standpoint and where -- if you're getting confirmation from these other pieces and it's becoming meaningful where that's -- it's especially looking at -- I know you've talked about the number of vision center visits being a record number and I was wondering directionally, can you talk to the dollar opportunity? Are we -- is that a smaller opportunity, are these smaller hospitals coming through and the number's bigger but the dollar opportunity may be smaller or is that not the case?

This is Marc. We don't talk a lot about our pipeline numbers, but I think as we look at that pipeline we see a mix of deals that continues to span what we historically see. We see some strong community hospitals in the mix, we see some IVM's coming into the mix, and I don't think anything Mike said should be taken as these new initiatives are driving our bookings. I think in some targeted services areas we're pleased with the progress, but for example, rxStation, we're just turning those on and really have negligible bookings to date in that space, hence are going on the road, if you will, to go take these to the clients to drive more demand there.

Okay, great, thank you very much.

Your next question comes from the line of Steve Halper of Thomas Weisel Partners. Please proceed.

Yes, hi, Marc. On the tax rate it looks like it was a little bit below what we were looking at, was there anything there that -- of notice?

Well, I think it's 35.8% and we thought we were looking for 36%.

Okay.

We would admit we could be 0.2 of a percent off.

No, no, my number was just higher, then. (LAUGHTER)

Come on, Marc.

Sorry.

All right, that was my only question.

Okay.

Thanks.

And your next question comes from the line of Atif Rahim of JPMorgan. Please proceed.

Hi, thanks. Mars, I'm not sure if I missed it but usually you comment on the deals that are north of $5 million or $10 million, I'm not sure if you spoke about that this quarter. And then secondly, on the revenue guidance, given your updated guidance it looks like you're still looking for something like mid teens top-line growth in the back half of 2008. Could you give us some color on where that growth is going to come from?

Yes, a lot of the comparable growth obviously comes from the fact that our comps are going to be lower relative to Q3 and Q4 from a hardware perspective. You're going to go from record -- significant record levels of hardware in Q1 and !2 to Q3, which basically had the lowest level of hardware that we can recall. So I think you're also going to see -- we talked a little about the fact that we are adding more headcount in our services organization. We see some good opportunity there to grow that business. It's grown significantly in the past, but we brought that headcount in on Q1. They weren't productive and driving revenue but we will get them trained up and get them out in the field working as we hit the back half of the year. So I think to comparables, stronger services, continued strength in the software as we look at our forecast and our pipeline just shows an overall strengthening in almost all the components of our top line, except for revenue, and given that the revenue should be in that neutral from a growth perspective in the last half we feel pretty good about looking at double-digit growth for the year.

Okay, and then in number -- in terms of the number of deals north of $5 million or $10 million?

Yes, there were -- this is Mike -- 11 contracts over $5 million, and seven of which were over $10 million.

Okay, thanks, and then just a quick follow up. You said you're going to start recognizing margin on the UK contract in the back half of '08, any idea on the numbers there, what the EBIT contribution might be?

Yes, the statement we're making is that we expect -- not that we will, but we expect to begin recognizing margin in the last part of '08, and at this point we'll have to work to know exactly what that financial impact is. As soon as we have better visibility we'll obviously share that with investors, but currently there's nothing in our numbers or our guidance for '08 relative to that.

Okay, that's great. Thank you.

And your next question comes from the line of Anthony Vendetti of Maxim Group. Please proceed.

Thanks. Good afternoon. That was one of my questions was the impact and the margin contribution, but during the call there was a mention that has been -- because of the transition to new leadership at NHS there's been a slowing of the implementation a little bit. Is that in your forecast, and do you expect that to pick back up? Is everyth -- basically --?

Yes, this is Marc. I think that what we've indicated is that in the south there is an ongoing contract reset process and it makes sense as that's ongoing that you're going to minimize the work you're doing there until you know how you're going forward. So we really can't comment on the status of that process, but we continue working under our existing contract, and we would expect that to be settled out by the last half of the year, and we would get back to more normalized levels of service revenue coming from the southern cluster.

Just to follow up on the southern cluster, is it possible that an outcome could be you taking on a greater responsibility there?

Yes, we obviously can't speak to any hypothetical things that might occur. We are really limited to indicating that we are continuing to work under the existing contract and we will continue to do that until reset occurs or if reset occurs. So we'll continue to work as we are working now and, once again, whether or not reset occurs does not impact our ability to -- as we look forward to get our ducks in a row and begin recognizing margin in those clusters.

So then there's not a likelihood of a diminished responsibility is the point?

Once again, we can't comment on any hypothetical situations. We're continuing to work under the contract and we'll provide an update as we are able.

Okay, thank you.

And your next question comes from the line of James Kumpel of FBR Capital Markets. Please proceed.

Good afternoon, guys. Marc, can you talk about about the auct -- your own auction-rate securities and maybe you can comment on the amount that you sold between year-end 2007 and the end of the first quarter and if you've been able to liquidate any more?

Yes, we've -- we got out of about $50 million of auction-rate securities after the first of the year, so we're kind of in the $150 million range or so, and we're down to, as I said, $106 million par with -- and recording a temporary impairment of $5 million at $101 million. We're pretty comfortable with that investment. We have moved to the long term because those auctions are not settling currently, but those bonds are backed by either the U.S -- they're all AAA rated, they're either backed by the U.S. government or a state government, so we're very comfortable in our ability at some point to realize par from those obligations. And the good news is our strong cash performance and strong cash on the balance sheet means that we have the ability to hold those and enter some very nice tax-free rates of return for the foreseeable future.

Is the $5 million in temporary impairment, is that related to the non-federally-backed student loan portfolio, and if so, what percentage markdown was that?

It's over the entire portfolio. We basically are -- our broker is providing guidance relative to a model that they're providing, which I think may be the only broker doing that, which calculated that relatively low level, and it's indicative of the quality of the credits and the fact that it's all being backed by either the U.S. or state governments.

And the issuers, can you comment on who the issuers were?

Other than to say that they are AAA rated, you -- as in getting back (LAUGHTER) I probably won't lay out our entire portfolio, but we feel very comfortable with where are. Obviously from a lot of focus out in the marketplace and you can see some people taking some big write offs that have the mortgage backed and corporate backed, but we were very careful in what we put our money in and feel very confident that there'll be a resolution to those credits and to that marketplace. They're going to look to refinance, and given their credits, they'll be able to do that, we would expect, within the next 12 months.

On the G&A line, it was significantly below what we had been modeling and your experience in 2007. Is your guidance for the remainder of 2008 essentially taking into account current rates as they exist today, so essentially extrapolating from the $22.7 million that you put up in the first quarter, or does it assume a return to the mother normalized levels of G&A that you would record on the income statement in 2007?

Jim, I think we clearly had an effect of impact that was much higher than we expected this quarter that was positive, and impacted that by probably three -- somewhere in the neighborhood of $3 million, so as I was modeling forward I would probably exclude that one-time benefit that you saw in Q1 as I'm modeling forward to Q2 and beyond.

So something like $25 million, $26 million would be more of a normalized level to start from?

Yes.

Okay, okay. And then finally just in terms of the -- in terms of the PowerWorks comments, can you comment as to whether or not you're seeing in the marketplace any change in the dynamics or change in the considerations by clients from the Misys Allscripts link-up and if you're seeing any benefit from the loosening of Stark rules last year?

Yes, I -- this is Trace. I think we have -- as we've had mentioned on previous calls, we have seen some benefit from the loosening of Stark, which has, I think, benefited all of us in the business. Where I think Cerner is particularly strong is the platform that we represent. Our Millennium platform supports both the ambulatory as well as the inpatient environment, so we have -- unlike some of our competitors, they haven't had the advantage of that platform and the solid footing that many of large IDNs, the large health systems are looking for today as they extend the reach from their provider environment,, their hospitals that is, out into the physician community. So we like our position, vis-a-vis both Misys and Allscripts.

And has there been any change in dynamics as a result of that new link-up, because Allscripts has a pretty good reputation for its EMRs and Misys clearly has a pretty big footprint?

Yes,Trace, I'll add -- the comment I would add is that the traction we are seeing, as Trace mentioned earlier, in the marketplace is really around leveraging our client base and having some regional level of sponsorship to take advantage of the Stark allowances, and so that's been driving our marketplace. When we look at the merger between Allscripts and Misys we don't see them getting lift from that, and specifically we don't see them better positioned because of that, vis-a-vis the way the clients are -- the way the prospects and clients are purchasing today the PowerWorks model.

Thank you very much. That's helpful.

And your next question comes from the line of Richard close of Jefferies. Please proceed.

All right, thank you. I'll try to keep it quick here. On the PowerWorks, did you guys actually say what the year-over-year growth in bookings were?

No, we didn't.

Okay. And then on software, you mentioned strong growth there, did you give a percentage number on the software?

We did not, Richard. As you know we don't break out the detail relative to that. The detail on the business model usually is on a revenue basis. At the end of the year we do provide that but not in the quarter.

Okay, but would you say they were within your expectations for the first quarter?

Yes, we do a very comprehensive forecasting activity at the beginning of each quarter to lay things out, and what we ended up with certainly -- we expect it to be stronger in software as our pipeline for 2008 rolls out. As we indicated on the call relative to the Millennium 2007 implementations we're accomplishing, and that was -- so it was within our forecast and our expectations.

Okay, great. And then Trace had mentioned the Choose and Book and the positive things that were going on there. I guess I came across an article on some technical problems. Do you have any commentary around those issues with Choose and Book in the UK, or is that just an article reaching?

This is Jeff. As Marc said before, most of the communication goes through Connecting for Health, however I think in this space there is the communications that are going on out there. There is a new release that's scheduled to go in. Prior to that new release going in there's been a technology problem that's been pinpointed to the technical stack and so it is accurate in that they took a pause to confirm that problem before dropping this next release in. But it hasn't been anything material or that would change -- that we think would change the adoption or the take-up and we're pretty excited about the new capabilities in the next release that's going to go in there.

okay. And then, Marc, is everything going as planned on -- outside of the southern cluster?

You mean the rest of our business other than southern cluster?

Yes, yes.

Relative to the UK specifically, yes, we're -- as far as when we do our forecast and do our projections for the quarter, those projects are delivering as we are projecting them.

Okay, thank you.

Your next question comes from the line of Sean Wieland of Piper Jaffray. Please proceed.

Hi, thank you. I wanted to ask a question about the evaluation process that your customers are undergoing when they're making decisions, did you see -- or are you seeing any changes in how they're evaluating systems and contracts, particularly executive-level sponsorship at the hospital or additional board-level review processes?

This is Mike. I'll comment on the U.S. We really haven't seen a fundamental change in the selection processes. In a typical situation, a prospect hires a third party to help them navigate the process and there really has been very little innovation. I would say that in general, the market puts a high value on seeing the -- seeing and touching and client referenceability and really seeing the achievement that a solution provider has delivered, so we view that as playing into our strengths. We've always done well connecting into the C suite. They continue to drive decisions. There's obviously clinical constituencies that are supporting the process, but we continue to monitor everyone. Every opportunity has a tendency to play out in some unique aspect, but the fundamentals of the selection processes really haven't changed.

Okay. The percentage of deals that were signed in mid to late March, is that consistent with what you've seen in past quarters, in terms of the timing of the deal flow during the quarter?

Yes.

Okay. And then last question, is the new EPS guidance, up $0.03, does that include the accretion from the potential share buyback?

We haven't factored any of that in. Until we get a chance to get into the market at the level that we've announced it's not going to significantly move that meter, but it does not include any impact on that.

Okay. And I think that's it. Thank you very much.

Next question?

And your next question comes from the line of Frank Sparacino of First Analysis. Please proceed.

Hi, Marc, this is (inaudible) just on that HS. Can you remind me the event that triggers the margin change? And then between now and then what could happen that would push that out farther, given there's been a fair amount of negative news that doesn't seem to be impacting your confidence in the timing of that?

Yes, the key element relative to recognition of margin on the UK-cluster contracts, at this point we're under long-term contract accounting. To be able to start recognizing margin under long-term contract accounting you really have to be able to show a history of being able to accurately estimate your cost. What we didn't have going into those projects is the history of this type of project and how we -- accurate we are at being able to estimate those coughs. We now have a fairly good history and fortunately we have a fairly good history of accurately estimating the work effort that it's taking to go through these projects. So from our perspective and from the accounting perspective, those are all elements that that given time and given our experience that we would expect by the end of the year to have a broad level of experience that would allow us to meet the requirements under 81-1, our long-term contract accounting, to go ahead and start recognizing revenue. So it's really more experience than it is any specific event and that's why we continue to indicate our expectation that, as we look toward year end of recognizing margin on these contracts irrespective of any specific event or status of the project.

Thank you.

And your final question comes from the line of Sandy Draper of Raymond James. Please proceed.

Thanks. Pretty much all my questions have been asked and answered. Maybe just one thing, Marc, and you may not have seen it, or maybe this is for Neal or someone else. There was an article about some -- similar to what we hear out of the UK, there was something on some noise in Australia about some delays. I don't know if you've seen the article or not, and if you have any commentary on how things are going down there or if that's something that we should be watching, that would just be helpful? Thanks.

Sandy, this is Trace. I have not seen that article you're referencing, but we have -- as you know we have been selected for both New South Wales -- the state of New South Wales and Victoria in Australia. Victoria has had some delays in their project rollout, I would say most of which have been political in nature, but we expect to see that regenerate itself here in the second and third quarters.

Okay, great. Yes, it was on Victoria, so that's helpful. Thanks.

At this point I'd turn it over to Neal for closing comments.

Yes, and I'll just use Sandy's statement that all questions have been answered. (LAUGHTER). That will be a first. So let me just make a few comments here in closing. Most times during my reflection of what we do, I will clearly get out what we do is very hard. We're this strange layer of the next -- of the new -- of new delivery systems -- healthcare delivery systems, whether it be hospitals, doctors, offices, laboratories, retail pharmacy, we touch everything so that's what makes us -- what we do, very, very hard. So there is going to be in Victoria and Australia and the south in London -- or in the south and the UK, there will be bumps to what we do. Fundamentally, though, almost all trends that I look at that are significant at Cerner are very, very positive -- are positive, and most of them are very positive. Those of you that know me know that I'm very, very critical, and I'm fairly transparent, too.

So, we're really -- we're developing a real powerful Company here and it continues to evolve, and it continues to grow in, frankly, strength. Plus, our ability to innovate is going -- we are funding that and then we are using that, and broadly we are creating another type of company, because we will -- so our goal -- we're heads-down here to finish this decade very, very strong, and we are getting -- our momentum is growing. We're going to end this decade very strong, and at the end we're going to have a very significant strategic footprint in the United States, without question. We will have a very measurable part of acute care where we're, if you will, the motherboard of how those health systems or hospitals operate. We're going to have a very important -- it'll be a smaller percent, but we'll have an important and growing percent of physician offices in this part of our footprint, as well as things such as retail pharmacy.

So we're -- that strategic footprint plus our ability to innovate -- and I thought Jeff said it very well in his speech -- it keeps the excitement here very high, because healthcare is going to, in the next ten years, double in size, double in expenditure, and nobody those how to slow it down, let alone stop it, and nobody can stop it. So we're -- we feel like we're at the right place, right time, and with the right kind of scale and experience and confidence on how to create big -- large value. So we're having -- this is all hard work, but it is a good place to be and we feel like we're at the right time. So thank you for your time, and I'm sure we'll be in touch.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.